Note: High Frequency Trading (HFT) has no useful social function. It is used to make tremendous amounts of money by executing trades often and rapidly in fractions of a second. This is accomplished through the use of very high speed computers and proprietary computer algorithms.

Trading has a few simple rules – do the opposite of Goldman’s Thomas Stolper; don’t fight the Fed; and buy low, sell high. However, as this series of charts from Nanex shows, it is the latter rule that is the easiest to comprehend and yet – thanks to massive and obvious HFT manipulation – is an extremely difficult thing to do. As Nanex’s Eric Hunsader notes, high frequency trading algos do not get much clearer than this as the machines buy low (from you) and sell high (to you) each and every millisecond of the trading day.

Via Nanex:

Nanex ~ 11-Jun-2013 ~ Clever HFT Manipulation

Manipulation by high frequency trading algorithms doesn’t get much clearer than this.

1. ASBC trades color coded by exchange and NBBO shaded gray.
As soon as the market closed (16:00), the NBBO (National Best Bid/Offer) rapidly expanded. What happened next will astound you..

2. ASBC trades color coded by exchange and NBBO shaded gray. Zooming to about 2 minutes of time.
Zooming in to this level, you can see the trades at Nasdaq (gray dots) scattered between $15.05 to $15:67.
Also, the wisps of gray lines shows the NBBO (best bid/ask) is changing rapidly.

3. ASBC trades color coded by exchange and NBBO shaded gray. Zooming to about 27 seconds of time.
Zooming to this level, we can make out the wild swings in the NBBO. Incredible!
The bottom of the gray shading is the best bid (the price someone is willing to pay), the top is the best ask (the price that someone will sell at).

4. ASBC trades color coded by exchange and NBBO shaded gray. Zooming to 5 seconds of time.
At this level, you can see the NBBO is actually changing even more wildly than we could see in the previous charts.

5. ASBC trades color coded by exchange and NBBO shaded gray. Zooming to 1 second of time.
At this level of time, you can see that the trades (gray dots) near the top end of the range executed at the best bid (bottom of the shading), while the trades near the lower end of the range executed at the best ask (top of the shading). Which means there is aggressive buying low and selling high. So who is on the other side: selling low and buying high?
Pretty clever HFT manipulation.

6. ASBC bids and asks color coded by exchange and NBBO shaded gray. These charts are the same as above, but show best bids and offers for a different view.

7. Zoom-2 ASBC bids and asks color coded by exchange and NBBO shaded gray. Zooming to about 27 seconds of time

ISDA Master Agreement

The ISDA master agreement is the most commonly used master contract for OTC derivative transactions internationally. It is used to govern many of the financial transactions between the City of Detroit and Wall Street. Below are links to the agreement and sites with explanations.